Matthew helps reinsurance edge closer to bottom: Gregory, Lancashire

Hurricane Matthew was a timely reminder that the benign loss environment won’t last forever, despite the storm’s final track causing far less damage than initial forecasts had suggested. While the insured loss isn’t expected to turn the softening reinsurance market cycle, it has pushed the sector slightly closer to the bottom, according to Paul Gregory of Lancashire Holdings Limited.
“As we look forward to 2017, we do not anticipate hurricane Matthew having any significant impact to the broader market conditions.

“However, it helps us edge slightly closer to the bottom of the cycle,” said Gregory, Group Chief Underwriting Officer (CUO) and Chief Executive Officer (CEO) of Lancashire Insurance Company (UK) Limited, during the firm’s third-quarter 2016 earnings release call.

Initially, the course and strength of hurricane Matthew suggested that it could be a significant U.S. landfalling hurricane event, and while it did touchdown on the U.S. coast and cause an economic damage of a reported $10 billion, the story could have been much worse.

Pressures in the reinsurance industry continue to mount, and with alternative reinsurance capital expanding, interest rates remaining low and competition high, the softening market cycle has persisted and rates continue to decline for all in the space.

Both traditional and alternative reinsurance capital providers are operating in a challenging environment, particularly in the U.S. property cat space that has experienced the steepest rate declines, and the removal of a substantial amount of capacity will likely contribute to a turn in the market.

Reinsurance broker Aon Benfield’s catastrophe modelling unit, Impact Forecasting, recently said that although the total economic loss from Matthew could reach as high as $10 billion, the loss to the public and private insurance and reinsurance industry is expected to total just 50% of this, roughly $5 billion.

While this underlines how even mature markets such as the U.S. are underinsured and lack from sufficient penetration, the amount of capital in the reinsurance sector, and reportedly sat on the sidelines waiting to enter is likely more than enough to replace the $5 billion, without having any meaningful impact on rates moving forward.

After all, some industry observers have noted that a $100 billion+ event is required to turn the market, so $5 billion at a time when the industry is suffering from a supply/demand imbalance is unlikely to have any influence.

It’s been discussed previously that the volume of capital both in the space and waiting to enter, from traditional and alternative reinsurance providers suggests a flattening of the reinsurance market cycle in the future, and that any price-surge post-event is likely to be far less dramatic than seen in previous cycles.

Nevertheless, and as highlighted by Gregory, a loss such as Matthew does push the current pricing cycle closer to the bottom, and also reminds the industry not be complacent during a prolonged period of benign losses.

Gregory discussed the benign landscape and the need to be prepared for events such as Matthew, and those that will cause more damage.

“Albeit we do know and we do appreciate that the loss environment this year and in recent years has not been particularly testing, this is something we do not forget. That said, for the combined ratio in the mid-70s, we certainly have a little bit of margin for when these losses inevitably do arrive.

“In fact, the fourth quarter has kicked off with hurricane Matthew, which turned out not to be as disruptive as first thought, but it’s again a well-timed reminder we are not in a benign loss environment indefinitely. With underwriting margins so tight, it’s not going to take much for the macro underwriting results for the industry to dip into the red,” said Gregory.